The digital future of banking

Equities 5 minutes to read
Danny Khoo

Sales Trader

Summary:  Disruption in the financial services industry continues to happen at a rapid pace. Last week, the Monetary Authority of Singapore issued 4 entities with digital bank licenses that will allow them to conduct digital banking businesses in Singapore. A digital bank (also called a Neobank) offers the same type of banking services as a traditional bank (deposits, withdrawals, loans and card services) except it operates entirely online without any physical infrastructure like a bank branch. This brings about a slew of benefits including a more efficient cost structure that might get passed on to consumers in the form of better deposit rates or lower fees.


This service is not entirely new though. Countries like the UK, Japan, US and China already have digital banks fully operational for a couple of years. Some examples are WeBank (owned by Tencent in China), MYbank (owned by Alibaba in China), SBI Sumishin in Japan and Monzo Bank Ltd in UK.

In Singapore, full digital bank licenses were awarded to the Grab-Singtel consortium and tech giant SEA Limited while the digital wholesale banking license was won by Ant Group and a consortium comprising of Greenland Financial holdings, Linklogis HK and Beijing Co-operative Equity Investment Fund Management. Like China, Singapore has chosen to award contenders who have e-commerce and payments experience instead of traditional banks with digital arms.

14 applicants vied for up to 5 digital licenses that were planned to be issued by the government. Some well-known names that applied but did not get the licenses include consortiums led by Razer Fintech, OSIM founder Ron Sim’s V3 Group, fintech firm iFAST and ByteDance Technology.


What are Digital banks allowed to do?

Like traditional banks, the full digital bank license allows these players to provide retail and non-retail customers with banking services like deposits, credit cards and mortgages. Firms with the digital wholesale banking license however are only allowed to take deposits and provide banking services to the SMEs and other non-retail segments.

Singapore’s digital banks will start with deposits per person capped at $75,000 or a total deposit cap of $50 million. Restrictions would only ease once it meets a paid up capital of $1.5b.

Some of the rules that differentiate digital banks from traditional banks includes the license to operate only one physical office and the lack of access to automated teller machine (ATMs) and cash deposit networks.


Benefits vs Costs

The main benefits to operating online is similar to any retail conglomerate out there. Fixed upfront and operating expenditures are expected to be significantly lower than the traditional banking model without the need to set up physical bank branches or employ as many sales staff. Lower cost gives the digital bank greater flexibility in offering their value added services at more competitive rates.

From a cost perspective, digital banks might have to allocate more investments into technology to ensure banking remains completely secure for their customers. As all transactions takes place online, it is paramount to have a state of the art system that can hold well in cyberattacks or software outages. Also, without the same customer interaction opportunities as traditional banks, marketing cost is expected to be much higher and is estimated to take up about 25-35% of operating expenses.


Regulation

The recent suspension of the anticipated Ant Group IPO by Chinese regulators highlights the beginning of more scrutiny in the digital banking space in China. Naturally, this would spell the end of the phenomenal growth in this space but also highlights the need for global governments to step in to ensure the growth does not pose systemic risk to the overall financial system.

Over the longer term, the regulation of this industry bodes well for a more favourable business environment. It would create greater consistency and stability for digital banks/fintech companies to plan business decisions that would have otherwise been difficult to do so. Long term private and institutional investors who might have been hesitant previously without an established regulatory environment would become more receptive to larger investments within this space

Nevertheless, it is also important to strike a good regulatory balance to continue fostering innovation in the digital space. Over regulation tends to stifle ideas that have led to the huge growth we have seen thus far.


Stocks in play


Singtel (Z74:xses) and SEA Ltd (SE:xnys) reacted positively on the news, with Singtel up as much as 11% to $2.60 at last Monday’s open before retracing lower over the past week to $2.31 while SEA Ltd rallied 15% to $212.33 before declining to $193.38 last Friday. On the other hand, iFAST (AIY:xses) was down 25% for the week after failing to secure their bid after a phenomenal 277% rally this year and Razer (01337:xhkg), who did not get selected for the digital wholesale bank license was also down 12.7% last week to $2.34.

Singtel, being majority owned by state investor Temasek, will be able to build trust among its customers and take in bank deposits. SEA Ltd has been strong player that experienced tremendous growth in the e-commerce space. The stock has gone up 5x in the past year and has seen annual revenue rise from $0.41b in 2017 to $3.586b in the past 12 months.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
Beethovenstrasse 33
CH-8002
Zurich
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved, we have put together a general Risk Warning and a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed here or within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.